Weigh multilevel marketing option carefully

by Rhonda Abrams on May 08, 2009, under Edge

If you’re an adult and you’re breathing, there’s a pretty good chance that sooner or later, a friend or acquaintance will approach you with a chance to “start your own business,” “be your own boss,” “become an independent distributor.”

What you’ll get is a pitch for a type of business referred to as multilevel marketing (MLM) – although it may be called by other names, including network, direct, affiliate, or matrix marketing. (Because these schemes get such a bad reputation, the companies change names to make them more attractive.)

Should you try it? After all, you may not have a lot of other choices, especially if you’re out of work. And your friend is very persuasive. They tell you how much they love the products or services they sell, how supportive the people in the program are, that they’ve made thousands of dollars. They’ll offer you a chance to start your own business for less than $199.

It’s going to sound really good. You’re going to be tempted. Should you give in to temptation?

In a word: No. Stop and read this first!

First, let me explain how MLM or network marketing works and how it differs from regular sales or a regular business.

• Single-level sales. You go out and sell a product or service and you either get paid for your time, or, more typically, get a commission on the amount of product or services you sell directly to customers.

• Multilevel programs. You go out and recruit other participants. You make money not only on the sales you make but on the sales of those you recruit.

Sounds great, right? In reality, MLM programs rank high on the list of fraud schemes, and the Federal Trade Commission (FTC) and most states’ attorney general have warnings and multiple lawsuits against many MLM programs.

That’s one of the reasons that it’s so cheap to get in: Many states regulate “business opportunities” requiring more than $200 to $500 initial investment. To stay under the radar, most MLM programs keep under that threshold.

Here’s what the FTC advises: “If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as ‘pyramiding.’ State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.”

Even if a program isn’t fraudulent, from a business point-of-view, MLM programs share the same fundamental flaws, including:

• Recruiting competitors. No one in legitimate business wants competitors. In MLM programs, your goal is to get lots of others selling the same product or service. In real businesses, you’d pay for exclusive territories. In MLM, you recruit competitors from among those nearest to you, in your church, neighborhood, friends – your best sales targets.

• Pay to be a customer. You’ll buy products or services you sell as well as training materials. Overwhelmingly MLM revenue comes from those recruited to be ‘business owners’ within a program. I view most MLM programs as thinly-disguised schemes to find customers, not build businesses.

• You’ll face pressure. Expect to be required – or pressured – to buy samples, marketing materials, training courses and tapes, attend seminars, and more. You’re very likely to spend far more than you’ll ever bring in from sales.

• You turn your friends and family into “prospects:” MLM programs typically suggest you sell to – and recruit – people you know well. Do you really want to be constantly beseeching those closest to you?

As with any business opportunity, before investing your time and money in a multilevel marketing program, really do your homework. Ask to speak to participants who do not recruit ANY others and who sell only to non-program customers. Ask for the average and medium income, not just a few examples. And ask how much money the average person makes in comparison to the total they spend on any and all products and services related to the program (including training). If they told you the truth, you’ll find it’s just about break-even at best.

Get on the Internet and look for information about your particular program, including lawsuits or Web sites set up by people who’ve left. Check out info from the FTC and www.pyramidschemealert.org. Be careful!

Copyright, Rhonda Abrams, 2009 Rhonda Abrams is the president of The Planning Shop, publisher of books for entrepreneurs. Her newest is “Successful Marketing: Secrets & Strategies.” Register for her free business tips newsletter at www.PlanningShop.com.

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